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PacifiCorp Anticipating Earnings Shortfall

PacifiCorp Anticipating Earnings Shortfall

PacifiCorp said last week it expects its third-quarter earnings will be 50% below securities analysts' expectations of $0.41/share and its annual earnings will be significantly below analysts' forecast of $1.27 per share.

The company said a significant decline in profit margin on U.S. regulated sales is expected to take a bite out of third-quarter earnings. Increased power sales, both retail and wholesale, unexpected outages at certain of the company's lower-cost generating plants and the lack of low-cost hydro resources in the region forced PacifiCorp to make unanticipated higher cost power purchases to meet wholesale and retail sales demand. Earnings also are expected to take a hit from increases in purchased power costs in the company's Australian electric business and the continued decline in the exchange rate between the U.S. and Australian dollar. The company also took a hit from its failed bid for British utility giant The Energy Group.

Moreover, the Utah Division of Public Utilities (DPU) is proposing adjustments in PacifiCorp's general rates case that, if accepted by the Utah Public Service Commission (PSC), could result in a $57.5 million reduction in customer prices. Any required adjustments to customer prices would be retroactive to February 1997. The adjustments include a proposed reduction of the company's authorized rate of return on equity to 10%, removal of certain cost items from the company's filed financial results for 1997 and other financial adjustments. Other intervening parties have proposed similar types of adjustments that could result in an even larger reduction of customer prices. PacifiCorp has requested a $6.7 million reduction in customer prices and proposes a new authorized rate of return on equity of 11.25%. A final order is expected from the PSC by the end of the year.

Meanwhile, the company is analyzing proposals from parties interested in acquiring its electric distribution assets in California. It signed an agreement last Thursday to sell its Montana service territory to Montana-based Flathead Electric Cooperative, which serves 12,000 customers in the state. Financial details of the agreement were not disclosed.

California and Montana represents about 6% of PacifiCorp's business. Observers have suggested the bad news and proposed sale of its operations in two states may be a precursor to a sale of the company, but PacifiCorp has denied those rumors.

PacifiCorp stock prices fell $1.88 (8%) to $21.19/share last Thursday in trading following the announcement.

Rocco Canonica

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